[MUSIC] Learning outcomes. After watching this video, you'll get a detailed understanding of the look back period. Let us now discuss the look back period in detail. Previously I told you that the look back period is important. Why is this important? It is important because, based on the duration of the look back period, we get three different types of momentum. The three different types of momentum are short term momentum, intermediate term momentum, long-term momentum. You will now study each of these in detail. Please note that, out of these three definitions, we will be using the intermediate term momentum in our strategy. So first we will study the returns of short and long-term momentum, and then see how these are a different from the intermediate term momentum. First, let us start off with the short term momentum. If the look-back period is at most one month, then we say that the calculated momentum is short term moment. Let us now see what happens when we view the short term momentum indicator. That is, returns of less than a month to study the price pattern. Exhaustive research has already been done in this area. Let us look at the research that has taken place. Professor Bruce Lehman, in his paper titled Fads, Martingales, and Market Efficiency, studies the short term momentum. He uses a look back period of one week and calculates the short term momentum. He finds that the portfolios of securities that had positive returns in the prior week typically had negative returns in the next week. Similarly, portfolios constructed with stocks that had negative returns in the prior week, typically had positive returns in the next week. Now, this is a very interesting result, we'll come back to this. Professor Narsimhan Jagdeesh, in his paper titled Evidence of Predictable Behavior of Security Returns, does an almost similar exercise as Lehman. He uses a look-back period of one month and finds similar results. He notices that last month's winners are next month's losers, and last month's losers are next month's winner. And the effect that he notices is large and significant. The main takeaway from these two papers is that short term winners, that is stocks with positive short term momentum, are losers in that near-term future. And short term losers, that is, stocks with negative short term momentum, are winners in the near-term future. This means, when we measure momentum over a short time horizon, we can expect to see a reversal in short term future items. Next, we now study long term momentum. If the look-back window is a longer period, say between 3 and 5 years, then we say that the momentum calculated is long term momentum. Werner DeBondt and Richard Thaler in their paper titled Does the Stock Market Overreact, study the effects of long term momentum. They use a look-back period of three years to calculate the long term momentum. They show that losers outperform winners in the next three years. The same results holds good for look-back period of five years also. This shows that long term momentum, in a way similar to short term momentum, leads to return reversals in the future. Now, we are starting intermediate term momentum. If the look-back window is between 6 and 12 months, then we say that the momentum calculated is intermediate term momentum. Again, Narasimhan Jegadeesh and Sheridan Titman, in their paper Returns to Buying Winners and Selling Losers, Implications for Stock Market Efficiency, use four different look-back periods of 3 months, 6 months, 9 moths, and 12 months. With holding periods of 3 months, 6 months, 9 months, and 12 months. That is, they use all combinations of these look-back and holding periods. They get 16 strategies. They find out there is no return reversal in this case, that is, in these 16 strategies, there are no return reversals. This means that the intermediate term momentum trends in the near future and not reversed. This is different from what we have observed in the case of short term and long term momentum. This is an anomaly, and we plan our strategy on this anomaly. Our strategy is based on this anomaly, and we will get into the final details later on. For now, let us summarize the important points discussed in this paper. The first point, Jegadeesh and Titman noticed that there is no return reversal but continuation of returns when you use a intermediate term momentum. Second point, they find that the best strategy is when you use a look-back period of 12 months and a holding period of 3 months. Third point, they find that the excess returns that you get by using an intermediate term momentum strategy are not long-lasting. In other words, if you use a look-back period of 12 months and hold the stocks for a long term, then again you experience return reversals. Let us summarize what we have learned so far. We have seen what happens when we consider different look-back periods, and we have also seen the importance of the intermediate term momentum. We will be using the intermediate term momentum in our trading strategy. This is what we have seen. With this, we finish the basics of momentum. In the next video, we will study the actual momentum strategy. [MUSIC]